The Dow Jones started trading on Tuesday nearly 1000 points but the pressures of an economic slowdown were too strong and the Dow had given up nearly 90% of its early gains. The big boost to the markets came after Trump urged the US Fed to be more aggressive on rate cuts. In fact, Trump even agreed to further tax cuts to boost growth. However, the Fed may not have much leeway after cutting rates by 50 bps in the first week of March. US markets have been under pressure due to the spiralling oil war as well as the global economic slowdown triggered by the Chinese Coronavirus.
The price war is on after the OPEC Russia alliance broke up over the weekend after Russia did not agree to an additional supply cut of 1.5 million bpd. Now, in a contrarian move, Saudi Arabia has decided to hike its oil production from 9.8 million bpd to 12.3 million bpd, one of the main reasons why the price of oil had fallen by 30% on Monday. This is more than the capacity of Saudi Aramco, which means KSA could even rely on inventories to push exports. Meanwhile Russia has boosted its output by 0.50 million bpd taking their total production to 11.8 million bpd. OPEC is now in an all out war for market share.
As the Coronavirus led to increased risk-off selling in emerging markets, Asia saw $9 billion worth of selling in equities in the first week of March. This is sharply higher than the $5.6 billion sold in the whole of February. India saw FII selling to the tune of $1.8 billion in the first week. Apart from the Chinese virus syndrome, the FIIs are also sceptical about the weakening rupee and the Yes Bank crisis that has raised a question mark over most private banks. Taiwan saw the heaviest sell-off to the tune of $3.6 billion while South Korea saw selling to the tune of $2.5 billion. MSCI Asia, ex-Japan, is down 11.8% this year.
HSBC has downgraded SBI on the back of its deal to acquire a stake in Yes Bank. To protect the integrity of the banking system, the government had called upon SBI to infuse Rs.2500 crore into Yes Bank and work out a rescue package for the bank. However, HSBC is of the view that the deal would impair the asset quality of SBI and has reduced the price target of SBI from Rs.405 to 305 and has downgraded the call from “Buy” to “Hold”. As part of the reconstruction package, SBI will immediately infuse Rs.2500 crore and take the infusion up to Rs.10,000 crore; either on its own or with other partners.
For the first time in its history, the US yield curve is totally under 1%. The 10-year bond yield had cracked below the 1% mark quite a few days back and on Monday even the 30-year bond yield also fell below the 1% mark. This is the first in the history of the US bond markets that the entire yield curve has been at sub-1% levels. Markets see this as a clear indication of an economic slowdown building up and also see the likelihood that the US Fed could cut the rates all the way back to the Zero levels. There is also another important trigger for markets to expect a slowdown in growth and that comes from inversion of the yield curve. The 2-monthy treasury yields are higher than the 2-year yields and the 3-year yield are higher than 5-year yields giving a clear indication of an impending recession in the US.
The crisis in the state of Madhya Pradesh came to a boil after Scindia resigned from the Congress party after a meeting with Narendra Modi and Amit Shah. Immediately, after his resignation, Sonia Gandhi announced the expulsion of Scindia from the Congress Party. Scindia had been disappointed that he had been sidelined by Kamal Nath in the state of MP. The resignation of Scindia puts the Congress government in MP in danger as the 22 resignations have reduced the Congress to a minority power. It remains to be seen how Kamal Nath manages the situation as he belongs to the old school of politics.
